House prices should be prevented from rising by more than 5pc a year to stop
another bubble destabilising the economy, a top property institute has urged.

The proposal, from the Royal Institution of Chartered Surveyors (RICS), followed a warning from Bank of England Governor Mark Carney yesterday that policymakers needed to be “vigilant” to the risks of a bubble caused by the Government’s mortgage subsidy scheme.

RICS said the Bank should police its proposed 5pc cap in house price inflation through its Financial Policy Committee (FPC). If prices pushed above the limit, the FPC could enforce lower loan-to-value or loan-to-income ratios, shorten mortgage terms, or restrict lending to prevent them spiralling higher.

The Bank “should consider limiting annual house price inflation to 5pc in order to prevent another housing bubble, reckless bank lending and a dangerous build up in household debt”, RICS said. “This policy would discourage households from taking on excessive debt out of fear of missing out on a price boom, and discourage lenders from rushing to relax their lending standards as they compete for market share.”

House prices are already rising at 5.4pc annually, according to Halifax’s August measure. RICS said it was “open minded” to thresholds other than 5pc, and even suggested using the powers on a regional basis to try to depress isolated bubbles, such as in London.

The proposals were not much different from Mr Carney’s suggestions for what the Bank might do to stamp out an early bubble. Asked about the dangers of a boom triggered by the Government’s Help-to-Buy cheap credit scheme, he said: “We do need to be vigilant.”

The Bank could use a cap on loan-to-value ratios and “more intensive supervision” of banks to rein in lending if the market was running out of control, he said. However, he stressed there was little sign of a housing boom yet, with “big pockets of the country where there has not been any meaningful recovery”.

Mr Carney’s pledge to keep an eye on the housing market came in the wake of mounting concerns about Help-to-Buy. Business secretary Vince Cable has questioned whether the scheme’s mortgage subsidy element should be introduced at all next year, and Barclays boss Antony Jenkins has warned of “the risk of a property-driven boom”.

The Council for Mortgage Lenders on Thursday reported a 29pc increase in gross lending in July to £16.7bn, largely to home movers, buy-to-let investors and remortgagors. Lending to first time buyers hit its highest level in fiver-and-a-half years, at £3.5bn.

In a bruising encounter with MPs on the Treasury Select Committee, the Governor also sounded an upbeat note about UK prospects. “The economy has certainly ... now picked up. There are signs that the growth is relatively broad based,” he said. “In recent weeks we’ve seen data consistent with some strengthening and broadening of that recovery.” However, he cautioned that “it is early days”.

He explained that the Bank’s guidance that interest rates will be held at least until unemployment drops to 7pc, which it has signalled would be late 2016, was designed “to reinforce this early momentum”. “Our job is to make sure [the recovery] is not another false dawn,” he said.

He also suggested that markets may have been at least partly right in their surprise reaction to his guidance. Government borrowing costs rose following the announcement, despite the pledge to keep rates low. Talking specifically about long-term rates, such as the 10 year gilt, he said: “My personal expectation was that long rates would rise.”

The yield on the 10-year gilt has risen from 2.481pc when the guidance was announced to 2.940pc, which Mr Canrey said was “consistent with a recovery in the economy”. The Government on Thursday sold £3.75bn of 10-year debt at 2.976pc, the highest price in more than two years.

MPs argued that the rise in long-term rates was effectively a tightening of policy. Mr Carney refused to counter that it was a loosening, arguing instead that it had made policy “more effective” and reiterating that the policy had made it easier for households and businesses to understand when interest rates would rise.

Andrew Tyrie, the TSC chairman, said: “It’s going to be pretty tough down The Dog and Duck working out whether this is a tightening or a loosening.”

Mr Tyrie added: "Credibility in monetary policy is hard won and easily lost. The new framework is more complex to explain than its predecessor. Rightly, the Bank is now engaged in bolstering credibility in its new framework with detailed explanations.

"Confidence in monetary policy will be enhanced where those detailed explanations provide greater certainty about the likely responses of the Bank as circumstances change."